Disclosure of environmental information and investments of firms

In recent years, voluntary approaches are expected to function as new environmental protection tools. This article analyzes whether environmental information of firms should be mandatorily disclosed or disclosed voluntarily, where consumers consider the environmental burdens of firms when buying their goods. If a mandatory policy is implemented, every firm in the market will be required to disclose their environmental burdens. On the contrary, only firms that want to disclose their environmental burdens will share their environmental information if a voluntary approach is implemented. This article particularly demonstrates the effects of the disclosure rule (mandatory or voluntary) on investment to reduce environmental burdens. The model has two types of firms, clean and dirty ones. Firms that investigate their environmental burdens and turn out to be dirty can invest to reduce them and become clean before they disclose their environmental information. The main conclusions in this article are as follows. (1) Mandatory disclosure policies may induce firms to invest more than a voluntary approach. (2) Firms may have lower expected profit under the mandatory rule than the voluntary approach. (3) Under full information disclosure policy, the environmental burden is smaller than that of other policies.